By the Numbers

Monitoring commercial real estate pressure points

Mary Beth Fisher, PhD | November 10, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

After mostly recovering from the pandemic, commercial real estate delinquency rates began rising in the middle of 2022 and have continued this year. Tighter financial conditions, high interest rates and declining property prices will almost certainly result in deterioration next year. Lenders and guarantors with the greatest levels of CRE exposure include government agencies along with US banks and life insurers. Those with concentrated exposures to potentially troubled CRE assets—away from government entities—could include some regional and community banks, CMBS investors in lower-rated tranches and some specialty finance companies.

There are a lot of ways to splice the $5.8 trillion commercial real estate debt market. The Federal Reserve and the FDIC both delineate multifamily ($2.1 trillion or 37%) from the rest of CRE ($3.6 trillion or 63%):

US banks dominate the ex-multifamily CRE market, as they originate and hold 59% ($2.1 trillion) of loans
Government agencies Ginnie Mae, Fannie Mae and Freddie Mac are the heavyweight backers of multifamily, accounting for 44% ($937 billion) of that sector, while banks make up 32%
Non-agency securitized CRE exposure comprises only 12% of CRE and 3% of multifamily loans, for a combined $483 billion.

Exhibit 1: Multifamily and commercial real estate loans outstanding

Note: Data as of Q2 2023.
Source: Federal Reserve Board Z1 (formerly Flow of Funds) data, Santander US Capital Markets

A complete breakdown of multifamily mortgage exposure is shown in Exhibit 2. Behind government agency and government sponsored entities (GSE) and US banks, the next largest exposure is at life insurance companies (10%).

Exhibit 2: Multifamily mortgage debt outstanding (%)

Note: Agency and GSE-backed mortgages include some held by Tennessee Valley Authority, Farmer Mac and smaller government agencies, as well as FHA loans not securitized. Data as of Q2 2023.
Source: Federal Reserve Board Z1 (formerly Flow of Funds) data, Santander US Capital Markets

Insurance companies are the second largest holders of CRE debt (14% or $505 billion) after banks (59% or $2.1 trillion), as shown in Exhibit 3. Securitized CRE accounts for 11% of lending ($418 billion) and finance companies and REITs comprise 8% ($306 billion).

Exhibit 3: Commercial real estate (ex-multifamily) debt outstanding (%)

Note: Insurance companies include both life insurance and property and casualty insurance companies. The bulk of commercial real estate exposure, $473 billion or 13% of the total, is held by life insurance companies; only $32 billion of CRE assets, or 0.9% of the total, is held by property and casualty insurance companies. Data as of Q2 2023.
Source: Federal Reserve Board Z1 (formerly Flow of Funds) data, Santander US Capital Markets

Pressure from concentrated exposures is less than it appears

There are several mitigating factors that diminish the risk of deteriorating performance snowballing into the broader economy:

The government agencies and GSEs are, obviously, backstopped by the government. Their underwriting standards also tend to be among the tightest and their delinquency rates among the lowest.
Although the insurance industry’s total exposure across both multifamily and CRE is approaching $1 trillion, it is diversely held, primarily by life insurance companies:
- The industry’s total commercial real estate exposure including loans, CMBS, REITs and other other real estate represented 12% of cash and invested assets at year-end 2022, according to a special report by the National Association of Insurance Commissioners (NAIC).
- The $626 billion of commercial mortgage loans held at year-end 2022 by the insurance industry was well diversified by property type: with 32% multifamily, 22% office properties and 17% industrial, and retail (16%), lodging and healthcare rounding out the balance.
- NAIC reports that life insurance companies are the most conservative lenders across the CRE spectrum. They required the lowest loan-to-value ratios, the highest debt service coverage ratios, and they have the lowest delinquency rates in the CRE finance industry.

Exhibit 4: Insurance industry commercial real estate exposure

Note: Date through year-end 2022.
Source: NAIC

The largest level of exposure is at the US banks, but this is also possibly the most diverse across the industry:
- Banks hold 45% of income-producing CRE mortgages (multifamily and core CRE), according to a study by Rich Hill at Cohen & Steers, diversified across more than 4,700 institutions. Note: the study uses data from the Mortgage Bankers Association, which reduces total CRE outstanding to $4.9 trillion by excluding over $600 billion of loans categorized as CRE by the Fed and FDIC, but which are also owner-occupied. The study also removes the nearly $500 billion of construction loans and focuses on income-producing loans only. Opinions vary about these restrictions, but data quoted below reflects them.
- The 25 largest banks hold about 13% of all CRE mortgages, but that represents only 4.3% of their total assets (Exhibit 5).
- By comparison, regional and community banks hold 32% of all CRE mortgages, and those loans represent 20% of their total assets. The exposure at regional and community banks is much more concentrated.
- Office loans account for 17% of all CRE loans at banks, while multifamily loans are 44%.
- Arguably a lot of regional and community banks finance smaller properties outside of major metro areas. However, plenty of them are located in major metro areas and have concentrated loan exposures (see: Signature Bank).

Exhibit 5: Relative exposure to CRE mortgages by bank size; Loans as a % of total bank assets

Note: Data thru March 2023.
Source: FDIC, Cohen & Steers

Finance companies and REITs represent a small proportion of the overall CRE loan market, but they have among the most concentrated exposures and likely represent the sector most vulnerable to performance deterioration.

The pressure points outlined above, both from the level and concentration of loan exposure, show where the vulnerabilities lie. Next week I’ll turn to a 2024 outlook and will examine what may be expected and how to position as a CRE investor over the coming year as performance deteriorates.

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

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